Cost recovery in a rolling horizon unit commitment with energy storage

Electricity market designs have to cope with a growing share of renewable energy sources. Payments to the generators have to ensure not only revenue adequacy but also incentivize the provision of an optimal amount of flexibility. This paper investigates the effects on global welfare of the introduction of (a) inexpensive storage and (b) a rolling horizon market design that supports the use of updated information. Such an environment could adversely affect some generators which could suffer significant losses due to additional commitment costs and may therefore decide to retire some generating units. This paper makes two contributions: First, it assesses the impact on welfare of uncertainty, a rolling horizon unit commitment, and the inclusion of storage. Second, it proposes a pricing mechanism that guarantees the profitability of all scheduled generators while maximizing the consumers´ surplus and compares this mechanism with existing cost-recovery methods. Simulation results show that the proposed market design does not affect all the generators in the same manner but outperforms other methods in terms of efficiency. They also show that a shorter commitment horizon reduces the profitability of storage.